As a group, Japanese tech companies are growing by only 1% a year, compared to 5% to 10% growth in developing nations and 2% to 3% in other developed nations, according to management consultant McKinsey.

Japan’s high-tech giants, once the envy of the world, are falling badly behind.

The sector could see its global market share drop by 20% from 2008 to 2013, according to recent McKinsey research. Between 2005 and 2009, the Japanese share of LCD-TV shipment fell to 30% from 40% in North America. Market share for PCs and mobile phones fell as well.

Outside of Japan, Japanese companies have almost no stake in the rapidly expanding software and IT services markets.

The implications, for investors looking at Japanese tech stocks, would be to choose companies that are building alliances and buying companies across borders that build on innovative use of technology, for example, “smart” electricity grids, health care supported by mobile devices, or cloud-computing services.

Japanese companies will need to change their culture significantly to hold onto top management in companies they acquire abroad, say the McKinsey authors, Ingo Beyer von Morgenstern, director in McKinsey’s Shanghai office,  and Peter Kenevan, a principal in the Tokyo office, and Ulrich Naeher, a director in Tokyo.

They will also need to “break through the emotional and cultural barriers to identifying and selling noncore assets—for example, white goods or semiconductors, depending on the company,” the authors wrote in the June issue of The McKinsey Quarterly

Another winning strategy they identify is to develop less-expensive products for specific emerging markets and outsource key functions to expose senior managers to local conditions.